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Tax Reforms in Georgia

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  • 1. Tax Reforms in Georgia April 12, 2011
  • 2. Country OverviewArea 69,700 sq kmPopulation (beginning of 2009) 4,385.4 thousandPopulation (beginning of 2010) 4,436.4 thousandBirth Rate (per thousand population) in 2009 14.4%Mortality rate (per thousand population) in 2009 10.6%Life expectancy* UK 80 years US 78 years Georgia 77 years Romania 74 years Turkey 72.5 yearsOfficial language GeorgianLiteracy 100% Population with at least secondary education (1-12 grades) (%, ages 25 and older) 91% Secondary enrolment ratio 2001-09 (% of secondary school-age population) 90% Ratio of Population with higher education (%, ages 25 and older) 29%Capital city TbilisiCurrency (code) Lari (GEL)GDP 2010 (estimate) US$ 11.7 blnGDP real growth rate 2010 6.4%GDP per capita 2010 (PPP) US$ 5,057Headline CPI Inflation 2010 (period average) 7.1%Non-food CPI Inflation 2010 (period average) 2.7%US$ - GEL 2010 (period average) 1.78 Source: Geostat, MOF, NBGsyExternal Public Debt to GDP 2010** 33.6% * Source: The World Factbook ** Includes exclusive liabilities of NBG to the IMF Tax Reforms in Georgia 2
  • 3. Reform Driven Economic Success GDP Nominal GDP (US$bln) Real GDP growth, y-o-y (%) 17 15% 12.3% 15 11.1% 16.5 12% 13 9.6% 14.6 9% 11 9.4% 12.8 11.7 12.8 9 10.8 6% 5.9% 10.2 6.4% 7 5.5% 6.5% 7.8 5.5% 3% 5 6.4 2.3% 0% 3 5.1 -3.8% 4.0 -3% 1 -1 -6% 2003 2004 2005 2006 2007 2008 2009 2010 Prel 2011F 2012F 2013F Source: Geostat GDP Per Capita – PPP and Nominal Components of Nominal GDP* (2010 E) GDP per capita (PPP) Nominal GDP per capita Other 15.7% Industry 16.9% 6,000 5,324 5,057 Education 5,000 4,680 4,907 4,754 4.8% 4,041 4,000 3,644 Construction 3,242 5.5% 2,966 Trade 16.6%US$ 3,000 Healthcare & 2,921 2,973 Social 2,000 2,315 2,455 2,629 Assistance 1,000 1,764 5.8% 1,478 1,187 Public 922 Agriculture Transport & 0 Administration 8.4% Communicatio 2003 2004 2005 2006 2007 2008 2009 2010E 2011F 13.0% Source: Geostat, IMF ns 11.6% * Calculated using nominal GDP (preliminary) at basic prices Source: Geostat Tax Reforms in Georgia 3
  • 4. Reforms - Creation of Favourable Market Environment Ease of Doing Business, 2011 (WB-IFC Doing Business Report) Economic Freedom Index, 2010 (Heritage Foundation) UK 4 USA 8 USA 5 Up from UK 11 Norway 8 112 in 2005 Estonia 16 GEORGIA 12 GEORGIA 26 Estonia 17 Latvia 50 Azerbaijan 54 Hungary 51 Armenia 48 Romania 63 Bulgaria 51 France 64 Romania 56 Turkey 67 Turkey 65 Italy 74 Kazakhstan 59 Bulgaria 75 Montenegro 66 Belarus Kazakhstan 82 68 Serbia 89 Azerbaijan 96 Russia 123 Russia 143 Ukraine 145 Ukraine 162TI 2010 Global Corruption Barometer: % addmitting having paid a TI 2010 Global Corruption Barometer: % of the surveyed claiming bribe within the last 12 month the corruption level has decreasedUnited Kingdom 1% GEORGIA 78% GEORGIA 3% Poland 26% Canada 4% Turkey 26% United States 5% Japan 14% Spain 5% Czech Republic 14% EU+ 5% Austria 9% France 7% Latvia 9% Georgia ranks 1st in the Austria 9% Lithuania 8% world in terms of the Japan 9% France 7% (public perception of the) Italy 13% United States 6% Czech Republic 14% Italy 5% decrease of the level of Poland 15% Canada 4% corruption Latvia 15% United Kingdom 3% Romania 28% Spain 3% Turkey 33% EU+ 3% Lithuania 34% Romania 2% Tax Reforms in Georgia 4
  • 5. One of the Best Low-Tax Jurisdictions „04A „05A „06A „07A ‟08A „09A ‟10ANumber of 21 7 7 7 6 6 6TaxesVAT 20% 20% 18% 18% 18% 18% 18% Social Tax + Social Tax + 12- 12% 12% 12% Income Tax Income TaxIncome Tax 20% 20% flat flat flat 32% 25% 20%Social Tax 33% 20% 20% 20% - - -Corporate 20% 20% 20% 20% 15% 15% 15%Profit TaxDividend &Interest 10% 10% 10% 10% 10% 5% 5%Income Tax  No payroll tax or social insurance tax  Foreign-source income of individuals fully exempted  No capital gains tax  Tax rates reduction timetable has been further accelerated in 2008  No wealth tax, inheritance tax or stamp duty Note: since 2005 7 taxes were left out of 22 and from 2008 only 6 are imposed Tax Reforms in Georgia 5
  • 6. Tax Reforms• Phase I: 2004-2007 – Fight against corruption – Eliminating red tape – Deep cut – Basic institutional changes• Phase II: 2007-2009 – Improving institutional capacity – Implementing collection enforcement reforms – Further reduction of tax burden• Phase III: 2010-2011 – Deep and comprehensive policy reform – Finishing customs reforms – Prioritizing services – Sharp reduction in tax compliance costs through IT enhancement Tax Reforms in Georgia 6
  • 7. Tax Reforms Phase 1•Drastically reduced formal tax burden (elimination of 15 type of taxes, loweringthe rates and leaving them all flat)•Removing all unnecessary and ineffective intervention from the Government intoprivate businesses;•Adoption of simple and fair rules of play and warranty its follow up from everysingle entity•Bringing tax and customs agencies under the ministry of finance•Phase I resulted into tax collection growth from the budget tax revenues of 12% toGDP in 2003 to 21.6% to GDP at end of 2007 Tax Reforms in Georgia 7
  • 8. Tax Reforms Phase 2– Institutional transformation – creation of the Revenue Service– Upgraded infrastructure – major renovation of the customs checkpoints and tax service centers– Setting up comprehensive IT solutions for tax collection – creation of taxpayers united database (tax+customs), ASYCUDA, etc– In 2008 corporate income tax reduced from 20% to 15%– Payroll taxes (PIT and social tax) merged into one and W.A. tax rate reduced from 27% to 25%– In 2009 reforms carried out towards reduction of tax burden:– Income Tax rate reduced from 25% to 20%– Tax rates for dividends and interest payments reduced from 10% to 7.5%– Creation tax free regimes for industrial zones and warehouses Tax Reforms in Georgia 8
  • 9. Tax Reforms Phase 3 New tax code based on the best international practices; Introduction of internationally accepted methods and practices; Introduction of different taxation regimes for taxpayers according to their needs - SMEs; Further elimination of bureaucratic barriers;– Sharp reduction in tax compliance costs through IT enhancement – www.rs.ge – e-services– Final shape of Georgian customs – risk based, minimal human interference, streamlined clearance (10 minutes rule) Tax Reforms in Georgia 9
  • 10. Effective Management and Improved AdministrationEffectively functioning public institutions and rule of law led to a dramaticreduction of informal activities Before Tax Reform After Tax ReformNumber of taxes 22 6Potential tax revenue as a 40-45% 28-30%percent of GDPActual tax revenue as a 15.6% 23.4%percent of GDPCompliance Rate 35% 78-85% Note: Compliance Rate (Actual tax revenue/Potencial tax revenue) increased due to Tax Code legislation, improving tax administration and reduced corruption level in tax services, decreased inefficiency. Tax Reforms in Georgia 10
  • 11. Effective Management and Improved Administration 7000 35.0%At the same timebetter 6000 30.0%administrationand simplified 5000 25.0%business Percent of GDP GEL Millionregulations 4000 20.0%provoked rapidgrowth of tax 3000 15.0%revenues 2000 10.0% 1000 5.0% 0 0.0% Nominal tax revenue Tax revenue as a percent of GDP Tax Reforms in Georgia 11
  • 12. Fiscal Challenges Financial crisis coupled Conventional deficit (cash) with Russian 4.0% 2.4% intervention resulted 2.0% economic slowdown and Percent of GDP expansion of budget 0.0% -1.5% deficit -1.4% -1.8% -1.8% -2.3% -2.0% -3.0% -1.5% -3.0% -3.0% -3.4% Our challenge remains -4.0% -4.7% to shift back the deficit -6.4% -6.0% -6.5% on sustainable level by -8.1% increasing tax base and -8.0% moderating expenditure -10.0% side 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Tax Reforms in Georgia 12
  • 13. Composition of Tax Revenues Year 2010 1% 4% 12% 25% Personal income tax profit tax VAT Excise Import Tax 12% Property tax 45%Tax Reforms in Georgia 13
  • 14. Recent Innovations for Taxpayers• Electronic Filing System implemented in 2008 and significantly improved in 2009• All declarations and invoices are available in electronic form• Registration in the system is based on taxpayers request Tax Reforms in Georgia 14
  • 15. Tax Administration Compliance Facilitation and Services Monthly Declaration Statistics Robust e-filing and e-payment systems Number of e-filings Number of hard copy declarations Unified Cards for Customs and Tax Liabilities Princple of “Good Faith” 250000 Special Treatment of Micro and Small businesses 200000 Electronic VAT Invoices 150000 Electronic Administration System • Risk Based Selection of Taxpayers for Control 100000 • Electronic Assignments for Tax Officers 50000 • Electronic Performance Monitoring Risk Based Tax Audit 0 May… Jan-10 Jan-11 Dec-09 Jun-10 Jul-10 Sep-10 Oct-10 Dec-10 Mar-10 Aug-10 Feb-10 Apr-10 Feb-11 Nov-09 Nov-10 Advance Ruling Accelerated Services Personal Tax Agent e-filing: Number of Registered Users e-filing vs. hard copy declarations Number of Registered Users 300,000 100.0% 250,000 80.0%150,000 200,000 60.0%100,000 150,000 40.0% 50,000 100,000 50,000 20.0% 0 0 0.0% Jan-10 Jan-11 May-10 Jun-10 Dec-09 Jul-10 Sep-10 Oct-10 Dec-10 Mar-10 Aug-10 Feb-10 Apr-10 Feb-11 Nov-09 Nov-10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Electronic Paper based Tax Reforms in Georgia % of Electronic % of Paper based 15
  • 16. Purpose of the New Tax CodeThe new tax legislation will simplify Doing Business in a following ways:• Increase public trust towards Tax System;• Formation of Stable and Sustainable Tax environment;• Encouraging business legalization;• Simplification of legal Provisions – Removing ambiguities;• Reduction of Tax Compliance burden – Simplification of Tax Administration;• Evenly distribution of tax burden;• Using the best international tax practices, EU directives. Tax Reforms in Georgia 16
  • 17. Unification of tax and customs codes• Incorporated Tax and Customs Code unifies taxpayers tax and customs assets/liabilities, by which companies can transfer excess amount available on tax card to cover customs liability and contrary;• Incorporated Tax and Customs Code will be more Systematic & User-Friendly ― Simplified Reporting Procedures, especially by E-filing ― Consolidated Tax Profile for Customs & Tax Issues ― Less Bureaucratic System to Navigate ― More Fair Regulation Implemented ― Quicker Resolution to Administrative Issues ― Easy Resolution to Overpayments ― More Flexibility in Managing Liabilities and Cash Flows ― Reduces Administrative Burden of Compliance ― Reduce Taxable Income & Pay less Taxes Tax Reforms in Georgia 17
  • 18. Customs Clearance Zone (GEZI )• Customs Clearance Zone (GEZI) is a large clearance centre - unprecedented for Georgia, covering several hectares with special parking area for hundreds of trucks.• It‟s possible to serve simultaneously an unlimited number of importers within an hour instead of days 24 hours in a week.• For clearance of the goods the importer will not have to hire a broker, agent/declarant or other intermediary and incur high costs for their service.• It is possible to postpone the service fee payment for 5 days upon clearance of the goods in the customs clearance zones. The fees have been halved in comparison to existing ones. Tax Reforms in Georgia 18
  • 19. Customs Risk Management• New system of declared goods’ checks implies risk-based customs control mechanism which greatly diminishes time needed for customs clearance of cargo.• There were higher chances of corruption before as 100% of goods were physically examined by a customs officer.• Now the customs risk management software decides which goods have to be checked based on predetermined selection criteria. Therefore, importers need only 1 hour to go through all customs clearance procedures.• Customs risk management system eliminates any chance of concluding deals between a customs officer and an importer and this is an effective mechanism against corruption. It also saves administrative resources.• Goods go through 4 different color corridors (program uses 4 colors: blue, green, red and yellow for different types of customs control) – almost the same approach is used for human movement.• There are several risk profiles in the system in order to prevent import of non-declared goods, manipulation with HS codes and to protect intellectual property rights.• Under Customs Risk management system it is possible to offer simplified customs clearance procedures to organizations associated with low customs risk such as government agencies and diplomatic organizations. Tax Reforms in Georgia 19
  • 20. Color corridors selected by customs risk management software Relevant color corridors selected by customs risk management Software for each customs regime (1st quarter of 2011 ) Meanings of Color Corridors Import 39%Green corridor - Immediate release without examination 40% 33%Yellow corridor - Documentary check 24% 30%Red corridor - Physical examination on of goods and 20%documents 4%Blue corridor - Examination at a later stage (post audit) 10% 0% Export Warehouse 60% 78%60% 80%45% 34% 60%30% 40%15% 5% 13% 2% 20% 9% 0%0% 0% Tax Reforms in Georgia 20
  • 21. Informational Technology Zones• Persons involved in IT activities have a right to apply for the status which will be awarded in no later than 10 business days in case certain requirements are met.• Tax benefits apply to the Provision of Services outside of Georgia by a person of the virtual zone who is exempt from:  corporate profit tax  VAT  export duties• Application for a status of a IT zone person must be submitted electronically at vz.mof.ge Tax Reforms in Georgia 21
  • 22. Free Industrial Zones• Free Industrial Zones is an unique opportunity for businesses to process, produce and export goods with a minimum tax burden. Benefits include:• exemption from corporate income tax, interests and dividends withholding taxes, VAT on exports, property tax and some other tax benefits• With Georgian Free Trade Agreements, one can export goods free of trade barriers to global markets consisting of more than 350 million consumers;• From Georgia to EU markets one can export more than 7,200 goods free of any trade barriers under the GSP+ (Globalized System of Preferences) arrangements.• Two Free Industrial Zones have already been established in Georgia – Kutaisi Poti Free Industrial Zones Tax Reforms in Georgia 22
  • 23. Free Warehouse Company• The Free Warehouse Company, from a taxation perspective, is designed as an integral logistical unit for international transit companies.• This Free Warehouse Enterprise categorization can be effectively used by international cargo companies, regional large network distributors and any company desiring to transport goods between Central Asia and global markets in the fastest and least costly manner possible. Tax Benefits include:• Exemption from corporate income tax applied to income received from re-exporting goods from free warehouses via the Free Warehouse Company;• Exemption from VAT on the supply of goods by a Free Warehouse Company to a VAT payer in a free warehouse. Tax Reforms in Georgia 23
  • 24. International Financial Company• Companies can improve their tax effectiveness by obtaining the special status of an international financial company.• International Financial Company is a financial institution carries out most of its services with parties outside of Georgia and its activities are tax exempt.• Companies involved in providing financial services such as Wealth management, Asset management, Financial intermediation and other similar activities can effectively use the status and privileges of an International Financial Company. Corporate income tax exemptions apply to:• Profits received from financial services provided by an International Financial Company;• Gains from sale of securities issued by an International Financial Company• Dividends paid by an International Financial Company. Tax Reforms in Georgia 24
  • 25. ADVANCE RULINGSTax authority issues 2 types of advance rulings: Advance private rulings – An advance tax ruling is a written statement given by the Tax authority to a taxpayer stating how it will interpret and apply specific provisions of tax law to a definite transactions the taxpayer is contemplating – An advance tax ruling is binding upon the Tax Authority. This means that if the transaction was carried out substantially as set out in the request, taxpayer will not be subject to any additional tax or sanctions. Public tax rulings – In case of decision of tax appeals council and other relevant administrative body which changes and/or establishes tax practice different from existing one, the Ministry of Finance is obliged to issue relevant legislator interpretation act – Public Tax Ruling Tax Reforms in Georgia 25
  • 26. Contribution of SME and large businesses to tax revenues Share of Registered Taxpayers Share in Tax RevenuesLarge Business >1% 70+%Medium Business 5-25% 10-25% 70-95%Small Business 0-10% Tax Reforms in Georgia 26
  • 27. Micro BusinessMicro business - entity with income less than to GEL 30,000  Micro Business is exempted against any taxExpected results:  Employment  Reduction of poverty through self-employment  Full legalization of business Tax Reforms in Georgia 27
  • 28. Small BusinessSmall business - Entity with income less than GEL 100,000Taxation Procedures:• Will be taxed with one single tax;• Tax rate of 3% or 5% of income; • In case of 5% Tax Rate - runs only simple "purchases and sales journal" and cash registers; • In case of 3% Tax Rate – entity must provide invoices for at least 60% of its income.• Removing requirements of book keeping in conformity with international standards. Tax Reforms in Georgia 28
  • 29. Advance tax ruling Advance Tax Ruling• Important mechanism in the world tax system in order to increase taxpayers procedures efficiency and comfort;• Person, who acts according with advance tax ruling, the Georgian Tax Authority may not be imposed taxes or tax sanctions.• An application to request an advance ruling must be in written form. The tax authority has the right to request the submission of additional documents. As a rule, the tax authority is obliged to issue an advance ruling within 60 days of receipt of the application. Advantages • Taxpayer is given the opportunity to take a preliminary decision from the Tax Authority of future reports on the basic financial operations and structuring; • Encouraging local entrepreneurs and foreign investors; • Simplify relationship between businesses and tax authorities. Tax Reforms in Georgia 29
  • 30. International practice of advance tax ruling• Procedure was imposed in various countries on different steps of development;• ATR has similar principles in all economies, excluding price and time limits;• The focal objective of ATR is to establish close contacts between the taxpayer and tax authority in order to better fulfill all the tax procedures;• Nowadays, ATR is used in more then 40 Countries. Tax Reforms in Georgia 30
  • 31. International Taxation Statistic of DTAs in Force 35• DTAs help to widen Georgia‟s economic space and strengthen its position as a hub 30 for business. 25• The main objective of a DTA is to 20 minimize tax barriers to the flows of trade and investment between two treaty 15 countries. 10• The number of DTAs were doubled in 5 2009-2010. 0 1995-2000 2001-2005 2006-2010 Tax Reforms in Georgia 31
  • 32. International Taxation Georgian draft of the “Agreement for the Avoidance of Double Taxation on Income and on Capital” is based on 2008 OECD Model Tax Convention on Income and on Capital. “Double Taxation Agreement” between Georgia and another country serves to prevent double taxation of income earned in one country by a resident of the other country. It also makes clear the taxing rights between Georgia and its treaty partner on different types of income arising from cross-border economic activities between the two countries. The main principle of Georgian DTAs is taxation based on residency – person shall be taxable in a country of residence on its worldwide income. If certain types of income are taxed in a country of source, Georgia gives tax credit to eliminate double taxation. Tax Reforms in Georgia 32
  • 33. International Taxation Georgian draft of the “Double Taxation Agreement” includes different provisions of 2008 OECD Model Tax Convention. Dividends and interest must be taxable according to residency. For instance, if Georgia‟s resident company receives dividends from Singapores resident company, it will be taxable only in Georgia. According to new changes introduced in Georgian tax code in 2009, withholding tax rates of dividends and interest are 5%. These incentives encourage to flow investment and to improve business climate in Georgia. Tax Reforms in Georgia 33
  • 34. Agreements for the Avoidance of Double TaxationCurrently Georgia has 30 active Double Taxation Agreements with major trade partner: EUROPEAN UNION OTHER STATES Austria Lithuania Azerbaijan Belgium Luxembourg Turkey Bulgaria Malta Turkmenistan United Kingdom Czech Republic Iran Germany Netherlands Singapore Denmark Poland Armenia Estonia Romania Uzbekistan Ireland Greece Ukraine Italy France China Latvia Finland Kazakhstan Tax Reforms in Georgia 34
  • 35. Double Tax Treaty Withholding Tax Rates EUROPEAN UNION OTHER STATES Permanent Country Dividends Interest Royalties Permanent Establishment Country Dividends Interest Royalties EstablishmentAustria 6 month 0% / 5% 0% 0% Azerbaijan 6 month 5% 5% 10%Belgium 9 month 5% 5% 5% / 10% 12 monthBulgaria 9 month 5% 5% 10% Turkey 5% 5% 10%United Kingdom 6 month 0% / 5% 0% 0% Turkmenistan 6 month 5% 5% 10%Germany 6 month 0% / 5% 0% 0% Iran 12 month 5% 5% 5%Denmark 6 month 0% / 5% 0% 0% Singapore 6 month 0% 0% 0%Estonia 9 month 5% 5% 10% Armenia 6 month 5% 5% 5%Italy 6 month 5% 0% 0% Uzbekistan 6 month 5% 5% 10%Ireland 6 month 0% / 5% 0% 0% Ukraine 12 month 5% 5% 10%Lithuania 9 month 5% 5% 10% Kazakhstan 6 month 5% 5% 10%Latvia 6 month 5% 5% 10% China 6 month 0% / 5% 5% 5%Luxembourg 6 month 0% / 5% 0% 0%Malta 6 month 0% 0% 0%Netherlands 6 month 0% / 5% 0% 0%Poland 6 month 5% 5% 10%Romania 9 month 5% 5% 5%Greece 9 month 5% 5% 5%France 24 month 5% 0% / 5% 0%Finland 6 month 0% / 5% 0% 0%Czech Republic 6 month 5% 5% 0% /5%10 Tax Reforms in Georgia 35
  • 36. Global Forum on Transparency and Exchange of Information for Tax Purposes In the first half of 2011 Georgia will become a member of Global Forum on Transparency and Exchange of Information for Tax Purposes. 98 States are the Members of Global Forum, including all OECD countries and all G20 countries. The main objectives of the Global Forum are: 1) to ensure that all its members are on an equal footing; and 2) will fully implement the standards of exchange of information they have committed to implement. Tax Reforms in Georgia 36
  • 37. One of the Best Performer by Forbes Tax Misery & Reform Index According to 2009 Tax Misery & Reform Index, release by Forbes Business & Financial News, Georgia is the fourth least tax burden country after Qatar, UAE and Hong Kong Since 1 January 2009, income tax declined to 20% from 25% Tax Reforms in Georgia 37
  • 38. ContactsRusudan KemulariaDeputy Minister of Finance of Georgia+995 32 262406R.kemularia@mof.ge Tax Reforms in Georgia 38